Moody’s boost to Modi

New Delhi: Moody’s Investors Service raised India’s sovereign rating for the first time since 2004, overlooking a haze of short-term economic uncertainties to bet on the nation’s prospects from a raft of policy changes by Prime Minister Narendra Modi. The global rating agency upgraded the rating by taking cognizance of the Modi government’s ongoing reforms such as the new Goods and Services Tax (GST) regime and the mechanisms for resolving bad loans and re-capitalise ailing public sector banks.

“The decision to raising the ratings is underpinned by Moody's expectation that continued progress on economic and institutional reforms will, over time, enhance India's high growth potential and its large and stable financing base for government debt, and will likely contribute to a gradual decline in the general government debt burden over the medium term,” the rating agency said in a statement.

“In the meantime, while India's high debt burden remains a constraint on the country's credit profile, Moody's believes that the reforms put in place have reduced the risk of a sharp increase in debt, even in potential downside scenarios,” Moody’s Investors Service said, to explain its upgrade for the Indian government’s rating as a local and foreign currency issuer from Baa3 with a positive outlook to Baa2 with a stable outlook.

Obligations rated Baa2 are subject to moderate credit risk. They are considered medium grade and as such may possess certain speculative characteristics. Baa3, by contrast, was the lowest investment grade rating. For the government, the upgrade would be a fitting rebuttal to critics of its handling of the economy, coming on the back of India’s rise in the World Bank’s ease of doing business index, and as a culmination of years of efforts by officials to get global rating agencies to acknowledge India’s improved macro-economic situation.

While it acknowledged that some steps such as the GST and demonetisation have ‘undermined’ growth in the near term, Moody’s said it expects real GDP growth in India to moderate to 6.7% in 2017-18. However, it stressed that the disruption effect of these reforms fade, and the government helps small and medium enterprises and exporters with compliance issues under the new indirect tax regime, growth will rise to 7.5% in 2018-19 and similarly robust growth thereafter.

“Longer term, India's growth potential is significantly higher than most other Baa-rated sovereigns,” the agency said. “While a number of important reforms remain at the design phase, Moody's believes that those implemented to date will advance the government's objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth,” it noted.

While it believes the reform programme will complement the existing shock-absorbance capacity provided by India's strong growth potential and improving global competitiveness, Moody's said they also offer greater confidence that the high level of public indebtedness which is India's principal credit weakness will remain stable, even in the event of shocks, and will ultimately decline.

Basing its upgrade on the sustainable growth that reforms will trigger and the greater stability in government debt going forward, the rating agency also flagged the need for acting on other important measures ‘which have yet to reach fruition’ such as planned land and labor market reforms.

Moody's expects India's debt-to-GDP ratio to rise by about one percentage point this fiscal year to 69% of GDP, as nominal GDP growth has slowed following demonetization and the implementation of GST. “The impact of the high debt load is already mitigated somewhat by the large pool of private savings available to finance government debt. Robust domestic demand has enabled the government to lengthen the maturity of its debt stock over time, with the weighted average maturity on the outstanding stock of debt now standing at 10.65 years, over 90% of which is owed to domestic institutions and denominated in rupees,” the agency said.

“The relatively fast pace of growth in incomes will continue to bolster the economy's shock absorption capacity. And even in periods of relatively slower growth, as seen recently, stable financing will mitigate the risk of a sharp deterioration in fiscal metrics,” Moody’s noted.

Although the rating agency agreed that a lot remains to be done such as fixing the GST’s implementation challenges, weak private sector investment and the slow resolution of banking bad loans, Moody’s said it expects at least some of these issues to be addressed over time and will help further improve the Indian government’s effectiveness and overall institutional framework.